Canadian, US Markets Explore Alternative Gas Sources

Canada's conventional gas production is leveling off, and will not be sufficient to meet North America's energy needs. To match increased demand, producers are turning to unconventional sources.

In Canada, which currently supplies most U.S. gas imports, gas production reached 16.71 billion cubic feet per day (bcf/d) in 2004. However, these figures are expected to level off, or even shrink. Conventional production at current levels will not be able to supply increasing demand in North America:

--Canadian demand (7.7 bcf/d in 2004) is expected to increase substantially, with the oil sands industry alone consuming 1 bcf/d by year-end.

--U.S. net import demand hit 9.3 bcf/d in 2004, and will rise to 10.95 bcf/d in 2007 and 13.7 bcf/d by 2015.

--Troubles in Mexico's energy sector have resulted in that country having to import small amounts of natural gas from the U.S.

This predicament has been putting upward pressure on prices--which peaked last year at over $13 per million British Thermal Units (mBTU) and have averaged over $8 per mBTU in 2006. It has also led U.S. and Canadian policymakers and the private sector to focus attention on "energy security," and has added impetus to the search for alternative forms of supply.

During the energy crisis of the late 1970s, the U.S. government initiated programs designed to reverse production declines. The thrust of these initiatives was to take unconventional gas--which is found in reservoirs of low permeability or in sources that conventional technology cannot exploit--and make production economically viable. Such unconventional gas reservoirs included:

--Tight gas formations

--Coal-bed methane (CBM)

--Devonian gas shales (in the Appalachian, Antrim and Barnett basins);

The results were impressive. Unconventional gas supply of 1.6 trillion cubic feet (tcf) in 1979 increased to 5.8 tcf in 2000 and 7.4 tcf in 2004.

Exploiting CBM may offer the most substantial production increases-- particularly in Canada. CBM production in the United States has involved drilling wells, displacing, processing and disposing of water, and facilitating gas production in small increments over a long period of time. However, this has led to a number of controversies.

Of the United States' 18,390 bcf in proven CBM reserves (2004), 86% are located in five states: Colorado, New Mexico, Wyoming, Alabama and Utah. While extraction in Alabama did not raise many concerns, mostly because producers and surface rights owners were one and the same, developments in Wyoming, Montana and Colorado have been marked by disputes between producers (mineral rights owners) and residents (surface rights owners):

1. Well spacing: One of the main concerns is the number of wells drilled, their spacing and the servicing infrastructure. For example, in the Powder River Basin of Wyoming, an area of approximately 9.1 million acres of formerly pristine rangeland, more than 15,000 wells have been drilled. Servicing these wells requires a network of 32,000 miles of roads and 73,000 miles of pipelines and power lines.

2. Property rights: CBM exploration is leaving a large footprint in non-traditional exploration and development areas. Many residents value the natural environment and have paid substantial prices for their properties, based on these qualities.

3. Government disputes: Although the federal and state governments involved are mostly pro-development, local governments are less inclined to side with industry. The lion's share of the revenues generated by CBM exploitation will accrue to the federal and state level, while the direct impacts of development fall within local government jurisdiction.

4. Water: The volume of water produced by CBM production is staggering. For example, in the Wyoming Powder River Basin alone, over 1.5 billion gallons of water is produced daily.

5. Environmentalist resistance: A vocal anti-CBM coalition of environmental activists and residents has been formed. Their unrelenting pressure has improved the stewardship of the resource. It is also leading to a much more careful approach to CBM by Canadian producers, government officials and residents.

Canadian CBM development is in its infancy, having begun in 2003. Alberta is leading the way with some commercial production, while British Columbia is still in the experimental stages. There are two main sources of CBM in Alberta -- Horseshoe Canyon and the Mannville coals:

Horseshoe Canyon: Production of 50 million cubic feet per day (mcf/d) in 2003 has increased to approximately 250 mcf/d in two years. However, gas concentrations are relatively low, limiting future prospects.

Mannville: Production expectations in this area are considerably larger, but there are likely to be significant water-disposal challenges. In an attempt to mitigate possible problems, the Alberta government formed the CBM/Natural Gas in Coal Multi-Stakeholder Advisory Committee, which spent most of last year in consultation with the public. The committee is expected to produce a report with recommendations in the next two months. Nevertheless, the Alberta government may still be unprepared for the environmental impacts involved.

Forbes